Poirier picks two hot juniors

It’s hard to find value in a market that has been overheated by record high commodity prices and merger mania, but Don Poirier, an analyst with Blackmont Capital who has followed the junior side since the late 1980s, likes the look of Continental Minerals (KMK-V, KMKCF-O) and Aurelian Resources (ARU-V, AUREF-O).

Continental Minerals, part of the Hunter-Dickinson stable, is focused on a Tibetan deal in China. The company holds a 60% interest of the Xietongmen copper-gold porphyry project, 240 km southwest of the city of Lhasa in the province of Tibet, western China.

“It’s a great property; it’s a very strong project,” Poirier says.

After visiting the property earlier this year, he wrote that the copper-gold deposit has “outstanding characteristics” and the project will benefit from new infrastructure being built in the area.

“Throughout our China visit, we were impressed by the quality and scale of industrialized activity in Tibet, ranging from urban revitalization through to massive investment in primary infrastructure, such as highways and railroads,” Poirier wrote in the May 2006 report. “Much of this development has taken place in the past five years, resulting in better access to markets in central China. With a strong transportation network, we believe that metal concentrates produced from the Xietongmen property will have a competitive advantage compared with those produced in North America.”

Poirier is recommending Continental as a speculative buy, with a 12-month target price of $6.50. It’s currently trading around $1.45 in 52-week range of $1.35-$2.96.

In 2004, Continental signed an option agreement with Great China Mining (gcha-o) to acquire up to a 60% interest in the Xietongmen property by funding US$8 million in exploration and US$2 million in option payments. Continental fulfilled its earn-in obligations in April 2006 and now owns 60% of Highland Mining, the parent company of Tibet Tian Yuan Minerals Exploration, a private, wholly owned Chinese corporation that controls 100% of the Xietongmen property.

Mineral title is acquired by application to the Chinese government in a procedure similar to map staking.

“We understand that this ownership structure has a strong legal foundation and that title of the property is secure,” Poirier wrote.

In April, Continental entered into a plan of arrangement to merge with Great China Mining and acquire 100% of Highland, and in turn, 100% of the Xietongmen property. Continental has locked up the support of shareholders, representing 67% of Great China Mining, who have agreed to accept one Continental share for every 8.78 Great China shares held. The merger, which has yet to close, remains subject to a number of conditions, including approval by Great China shareholders and regulatory approval.

The Xietongmen property is a 4-hour drive by car from the provincial capital of Lhasa (population 250,000), which is serviced by a modern airport facility. Paved highway and power transmission lines pass near the property’s southern portion.

“The transportation network and related infrastructure in Tibet exceeded our expectation,” Poirier remarks.

A new rail link has recently been completed to Lhasa, which is part of a larger system that connects south-central Tibet to markets in central China. The new segment is 1,150 km in length, and according to Chinese media sources, was completed ahead of schedule at a cost of US$3.1 billion.

The property lies south of the eastern Gangdese Mountains and covers 13 sq. km. The terrain is described as moderate and the principal area of interest is at an elevation of about 4,200 metres. The broad Tsangpo River valley is a couple of kilometres from the southern property boundary. Exploration activities can be carried out year-round due to the semi-arid climate, with the exception of a “few days” during the summer rainy season and after the “occasional” snowfall.

“With local supplies including labour, water and good rail and highway access for the Xietongmen property, we believe this project has very little risk associated with infrastructure,” Poirier says.

Xietongmen history

Continental optioned Xietongmen based on the potential for porphyry-related copper and gold mineralization. Previous regional exploration geochemical sampling by the Chinese government during the early 1980s and follow-up stream-sediment surveys by the Tibet Geological Bureau in 1989-1990 identified anomalous gold in the area. The Xietongmen prospect was revisited in 2000 and work included geological, geophysical and soil geochemical surveys, and the digging of several widely spaced test pits.

The Tibet geological team completed two separate underground adits at Xietongmen in 2001 and 2002. These adits and their crosscuts, which totalled 172 metres and 443 metres of length, respectively, were channel-sampled. This work reportedly revealed strong copper-gold mineralization, including 76 metres of 1.23% copper and 1.91 grams gold per tonne in one of the crosscuts.

Great China Mining acquired a 100% interest in the property in July 2003 and probed the discovery with two vertically drilled holes spaced 250 metres apart. The first hole intersected 235 metres of 0.47% copper and 0.58 gram gold, while the second hit 207 metres averaging 0.68% copper and 1.43 grams gold.

Continental began a due diligence program in late 2003 that included a review of all existing data, a site visit to the property and a physical examination of the underground workings, plus the re-logging and resampling of the drill core. Continental liked what it saw and worked out a deal with Great China.

Mineralization on the Xietongmen property occurs in a 300- to 500-metre-wide, west-northwest-trending, gossanous alteration zone that has been traced along strike for at least 2.5 km. Widespread, disseminated and quartz stockwork veinlet-hosted copper and gold mineralization is hosted by intermediate volcanic and intrusive-related rocks adjacent to an altered diorite porphyry stock.

Two principal areas of porphyry-type mineralization occur on the property: the Xietongmen deposit and a second zone, the Langtongmen zone, which encompasses an area of scattered outcrop 1.3 km west.

Continental began a major exploration campaign at Xietongmen in 2005, spending $6.3 million over the year. The work comprised geological mapping, collection of 1,100 rock-chip and 500 soil samples, and completion of 63 diamond-drill holes totalling 21,200 metres.

Drilling focused on the southeast portion of an open-ended copper and gold soil geochemical anomaly that measures 2.5 km in length, and began in the area surrounding the two previous drill holes and exploration adits, stepping outward as results were obtained. Continental’s first hole intersected 262 metres of 0.41% copper and 0.6 gram gold, starting 16 metres from surface.

Drilling was done on a 50-metre grid pattern to support an in-house resource estimate that was released in February 2006. The drilled area measures roughly 750 metres northwest-southeast by up to 350 metres wide and contains a measured resource of 106.3 million tonnes grading 0.49% copper and 0.73 gram gold, equal to 1.15 billion lbs. copper and 2.5 million oz. gold based on a 0.5% copper-equivalent cutoff. Additional inferred resources total 28.8 million tonnes averaging 0.43% copper and 0.59 gram gold, or 273 million lbs. copper and 550,000 oz. gold.

“The continuity of the mineralization in the deposit is one of the key features of this property,” Poirier says. “Metal grades for copper and gold occur together and show very low variability in lateral extent (from hole to hole) and down-hole in a vertical plane.”

The Xietongmen deposit remains open in three directions. A large granitic pluton occurs along the eastern side of the property and cuts off the eastern extension of the deposit. The mineralization averages about 200 metres thick. It extends from the base of a thin cover of barren overburden sequentially through a zone of oxidized volcani
c rock, through additional volcanic rock that contains gold and variably enriched copper in a zone of mixed supergene and hypogene minerals, and into hypogene copper-gold sulphide mineralization in volcanic rocks. The base of mineralization coincides with either the hangingwall contact of a hornblende-quartz-diorite sill encountered in each hole, or an alteration change that is up to several tens of metres above this contact.

Preliminary pit modelling suggests a possible waste-to-ore stripping ratio of somewhere between 1.25 and 2.

2006 campaign

The 2006 campaign is more comprehensive, with 40,000 metres of drilling planned. This $18.5-million program includes delineation drilling and engineering, environmental and socioeconomic baseline studies in preparation of feasibility work. A community engagement program has expanded along with the other project activities in 2006.

This year will also see exploration drilling of several other target areas on the property. Last year, the Langtongmen prospect was tested with a single drill hole, which intersected 135 metres of 0.28% copper and 0.31 gram gold beginning at a down-hole depth of 194 metres.

“We believe this property has above-average exploration potential and that positive news from the exploration phase of the current program will be a key driver for share-price appreciation,” Poirier says.

To the end of July, Continental had completed over 24,000 metres and 100 holes as part of its delineation drilling and engineering work on Xietongmen. Poirier says the results to date are positive and have increased the footprint of the deposit in three directions, resulting in an estimated 10-12% increase in its tonnage.

Ongoing metallurgical test work is being performed by SGS Lakefield Research on composite samples representing five different types of mineralization. Batch flotation tests show copper recoveries of 86.5% for supergene, or enriched secondary mineralization, to 92-95% for transition and primary (hypogene) mineralization. Gold recoveries averaged about 69%.

“We are pleased with the results, noting that gold recoveries were lower than we anticipated; copper recoveries were higher,” commented Poirier in a recent update. The metallurgical results suggest that a simple flow sheet using a conventional flotation process is suitable to produce a 25% copper concentrate containing significant gold and silver credits.

Continental intends to complete two feasibility studies. One will be prepared by independent consultants based in China, who may be better able to address sensitive cultural and socioeconomic conditions unique to Tibet. This document will be used to obtain licensing and mine permits for development of the project.

“The major risk factor for the project is the mining licence,” Poirier warns. “Resource extraction industries in China face tenure risks which may or may not be identified at the outset.”

A separate, North American-based study will be used for project financing. This study will lag behind the Chinese feasibility study by several months. Continental is optimistic that this later study can be completed by late 2007.

Poirier sees the potential for a 40,000-tonne-per-day open-pit operation that could start up as early as mid-2010 and support a 10-year mine life, assuming a 150-million-tonne resource. He pegs capital costs at US$325 million.

“We believe this property will be developed as an open-pit copper-gold mine later this decade,” states Poirier. “We estimate that the tonnage of the deposit will increase by almost 50% to 200 million tonnes by late 2006. The grade of copper or gold in the deposit is sufficiently high for development of the project on a single commodity and with production of both metals; we believe that the project will generate substantial cash flow.”

Aurelian

The discovery by Aurelian Resources in April 2006 of a major, high-grade epithermal gold system at its 100%-held Condor project in southeastern Ecuador, has propelled the stock to just under $30. Poirier began covering Aurelian after visiting the Condor project in early July, when the company’s shares were trading at just under $20. Poirier recommended it as a speculative buy, setting a target price of $31.25, based on what he feels is the geological potential for an 8-million-oz. resource.

“We are excited about this new discovery, believing that it represents one of the best in the past decade,” Poirier wrote in a July 24th research report. “The project is being closely monitored by the larger gold companies and we believe this discovery will attract a bid not unlike the M&A activity following the discoveries made by Arequipa Resources and Argentina Gold in the 1990s. These deposits and the recent lonore (Virginia Gold) discovery were found by exploration companies that became takeover targets. These projects were acquired before resource estimates were prepared.”

Poirier views Aurelian as a prime takeover target. “I just don’t think it will be here in six month’s time,” he predicts. “The results reported by Aurelian are amongst the best we have ever seen, highlighted by hole 57.”

Hole 57 intersected 189.2 metres grading 24 grams gold per tonne and 21.4 grams silver.

With the release of the latest batch of positive drill results, holes 64-66, high-grade mineralization of the Fruta del Norte (FDN) discovery is now confirmed to extend over a strike length of at least 600 metres. The new results extend the deposit another 200 metres north of hole 60, a previously reported hole that hit 81.4 metres averaging 5.54 grams gold and 8 grams silver per tonne (including a higher-grade 19.4 metres of 10.2 grams gold and 11.5 grams silver), starting 178 metres down-hole.

Hole 64 was collared 100 metres north of hole 60 and angled at minus 58 to the east. It hit 107.5 metres averaging 5 grams gold and 7.1 grams silver (including 37 metres of 10.6 grams gold and 12.6 grams silver), beginning 159 metres down-hole. Angled at minus 60, hole 65 extended the system another 100 metres to the north by intersecting 173 metres averaging 4.73 grams gold and 6.8 grams silver (including 74 metres of 8.43 grams gold and 12.1 grams silver), starting 188 metres down-hole.

Hole 66 tested the system downdip of hole 64 and intersected 192 metres of 3.97 grams gold and 6.4 grams silver (including 35.8 metres of 10.4 grams gold and 10.7 grams silver), starting from 178 metres depth.

The current drilling is targeting an intermediate-sulphidation epithermal gold-silver system buried under 165 to 260 metres of conglomerate that is predominantly post-mineralized in a pull-apart basin. The mineralized system is characterized by a combination of multi-phase quartz-carbonate-sulphide stockwork veining and hydrothermal brecciation in intensely silicified andesitic volcanic rocks that underlie the basin.

At the north end of the FDN discovery, the system is interpreted to be vertical, so the true width is between 45% and 60% of the down-hole intervals in the latest set of holes. The southern end of the system dips moderately to steeply westward. The system is confined to a 200-metre-wide, fault-bounded corridor. The mineralization is closed off to the east and at depth but there is evidence that the system was truncated and offset by a post-mineralized fault along the western edge of the corridor throughout the entire 700 metres of known strike length of the FDN zone.

FDN discovery

The FDN discovery occurs about 1 km north of Aurelian’s lower-grade 500,000-oz. Bonza-Las Penas gold deposit, which grades about 1 gram and is now interpreted as a leakage anomaly from the main mineralized zone at FDN.

To date, 27 holes have tested FDN, with results available for the first 17. Visual logging of core from holes not yet assayed suggests the mineralization extends north for another 100 metres, giving a strike length of at least 700 metres. But beyond that, the mineralization appears to be cut off by a steeply dipping, north-northeast-striking post-mineralized fault. The current thinking is
that the mineralization has been offset to the north-northeast. The area is currently being mapped in detail before Aurelian continues with stepout drilling to the north.

The Condor project is part of the La Zarza concession, which occupies the southeastern corner of Ecuador along the Peruvian border. The southern edge of the La Zarza concession is 80 km east-northeast of Loja, a 5- to 6-hour drive along paved highway for about a third of the distance, then on primary and secondary gravel roads for the remainder. Loja, a city of 177,000, is serviced by daily flights from the capital, Quito. Foot trails and rivers provide access to the heart of the concessions.

The local terrain is rugged and generally covered in tropical rain forest. The region is heavily dissected by fast-flowing streams and rivers in the Rio Zamora and Rio Nangaritza valleys at about 800 metres elevation, with steep ridges rising to narrow flat-topped plateaus, which are as high as 2,400 metres along the border.

Aurelian purchased the La Zarza concession from private interests in July 2002 and the concession became the core around which the Condor project took shape. Today, the company holds over 950 sq. km in 38 concessions that stretch for 90 km through the Zamora-Chinchipe and Monora-Santiago provinces of southeastern Ecuador, a region known as Cordillera del Condor.

“Aurelian’s land position in the area is large and highly prospective (and underexplored) based on the interpretation of the mineralizing events in the Condor project area,” Poirier wrote.

Richard Sillitoe, an independent consultant and one of the world’s leading experts on epithermal gold systems, recently visited the FDN discovery. He concluded that there is potential to find more mineralization at the discovery, and that additional blind epithermal gold targets could also be found elsewhere on the Aurelian concessions.

“We are confident that Aurelian has outlined a system (base case) that has 5.8 million ounces of gold as geological potential with its drilling to date,” Poirier noted in his report. “However, we believe that the geological potential of the FDN deposit mineral system could be in the order of 8.2 million ounces of gold and our valuation for the shares of Aurelian is predicted on the potential.”